December 30, 2016 / 8:32 AM / in 10 months

China's money rates rise over the year as c.bank tightens liquidity

SHANGHAI, Dec 30 (Reuters) - China's primary money rates
rose this week and were largely higher this year, driven by the
central bank's tight liquidity stance in the second half aimed
at curbing bubbles and reducing leverage in the banking system.
    The volume-weighted average rate of the benchmark seven-day
repo traded in the interbank market, considered
the best indicator of general liquidity in China, was 2.5776
percent as of Friday afternoon, nearly 13 pip higher compared
with the previous week's close. It was up more than 25 basis
points on the year.
    The Shanghai Interbank Offered Rate (SHIBOR) for the same
tenor stood at 2.5430 percent, flat from the previous week's
close. And it was nearly 20 basis points higher on the year.
    Liquidity has largely tightened since August and many market
participants said the central bank was increasingly inclined to
maintain its tight liquidity stance.
    "The overall liquidity conditions were relatively balanced
this week," said a Shanghai-based trader at a Chinese bank.
    She added that most institutions started to prepare cash
earlier than usual this year, while the distribution of fiscal
deposits had also largely eased the pressures brought about by a
central bank-led net drain. 
    The Ministry of Finance traditionally steps up the
distribution of fiscal deposits to firms and individuals
benefiting from government programs in the final week of
December. The revenue has lifted deposits in the banking system,
traders said.
    The People's Bank of China drained a net 245 billion yuan
($35.26 billion) from the money market through open market
operations this week. 
    However, through all of 2016, the central bank has injected
1.7272 trillion yuan on a net basis. The outstanding balance of
the open market operations stood at 1.315 trillion yuan by the
end of December. 
    The central bank injected only a net 10 billion yuan in
2015.
    Another trader at a Chinese bank in Shanghai said this
year's injections showed the central bank has changed its
methods.
    The PBOC "is now in favour of using a combination of open
market operations and medium-term lending facilities (MLF)
rather than the old way of cutting the required reserve ratio,"
said this trader, adding that the new method makes it easier for
the central bank to flexibly manage funds in the system.
    Starting in mid-February, the central bank started to
conduct open market operations on a daily basis, compared with
the previous twice a week.
    The central bank has also reintroduced use of longer tenors
in both open market operations and MLF loans, leading to more
expensive reverse repo operations and interest rates.
    Traders and analysts say these represent an effort to cut
dependence on cheap overnight borrowing and curb leverage in the
bond market.
    The last time the central bank cut the reserve requirement
ratio was Feb. 29, lowering the ratio down to 17 percent
following four cuts in 2015.
    Traders said a falling yuan has had a large negative impact
on the money market in the second half of this year, shrinking
base money.
    China's yuan is on course to be the worst
performing major Asian currency this year and has experienced
its biggest annual loss since 1994. 
    Traders said they expect liquidity may become tight again in
mid-January when households and companies shore up their cash
positions for the Lunar New Year holiday, which starts in late
January.
    "But overall liquidity conditions won't be too positive in
2017 as the central bank would not want to see money flooding
into the system," said the first trader.
 
Key money rates at a glance:
  
                  Volume-wei  Previous    Change (bps)               Volume
                  ghted       day (%)                                
                  average                                            
                  rate (%)                                           
 Interbank repo market
 Overnight        2.0946      2.1103      -1.57                      0.00
                                                                     
                                                                     
 Seven-day        2.5776      2.7218      -14.42                     0.00
                                                                     
                                                                     
 14-day           3.7946      4.4582      -66.36                     0.00
                                                                     
                                                                     
 Shanghai stock exchange repo market
 Overnight        0.5150      0.5500      -3.50                      801,842.0
                                                                     0
                                                                     
 Seven-day<CN7DR  1.5000      2.1950      -69.50                     92,002.30
 PO=SS>                                                              
 14-day           1.2100      2.6000      -139.00                    5,839.40
                                                                     
                                                                     
 PBOC Guidance Rates
 Overnight        2.1000      2.1300      -3.00                      
 <CN1DRPFIX=CFXS                                                     
 >                                                                   
 Seven-day        3.2400      3.2400      +0.00                      
 <CN7DRPFIX=CFXS                                                     
 >                                                                   
 14-day           3.7000      6.0000      -230.00                    
 <CN14DRPFIX=CFX                                                     
 S>                                                                  
 SHANGHAI INTERBANK OFFERED RATE
 Overnight        2.2300      2.2270      +0.30                      
                                                                     
 Seven-day        2.5430      2.5440      -0.10                      
                                                                     
 Three-month      3.2726      3.2651      +0.75                      
                                                                     
 
KEY INTEREST RATE SWAPS:
 Instrument            RIC         Rate          Spread vs 1 yr
                                                 official deposit
                                                 rate*
 2 yr IRS based on 1   CNABAD2YF=        0.0000              -1.5
 year benchmark                                  
 5 yr 7-day repo swap  CNYQB7R5Y=        3.7850               n/a
 
*This spread can be seen as a proxy for forward-looking market
expectations of an interest rate cut or rise
                                       
China FX and money market guide: 
 China debt market guide: 
 SHIBOR rates: 
 Reports on central bank open market operations: 
 New Chinese debt issues: 
 Prices for central bank bills, treasury bonds and sovereign
bonds: 
 Overview of China financial market data: 


($1 = 6.9493 Chinese yuan)

    
 (Reporting by Winni Zhou and David Stanway; Editing by Richard
Borsuk)

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